Breaking the cycle

An American flag flaps in the wind after Hurricane Irene in Atlantic City, N.J.

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September 3, 2011

By Jared BernsteinGuest blogger

…Have we, as a nation, lost the ability to self-correct?

Any system, whether it’s biological, political, or economic, must be able to diagnose and fix its problems if it is to survive. I don’t mean to be gloomy or dramatic, but I’m wondering if our political/economic system is up to that task.

We face an economy growing at stall speed and a moribund job market. We’re stuck in vicious cycle where weak labor demand and ongoing deleveraging means constrained households are not spending. The lack of consumer demand signals to corporations that this isn’t the time to invest in America, so they’re investing into emerging, expanding economies, and doing very nicely for it (corporate profits have more than recovered from the downturn).

Our only hope of turning this around in the near term is aggressive monetary and fiscal policy, and I’d say especially the latter. The President, I believe, has a solid jobs plan lined up that he will announce next week (assuming everyone’s aligned their schedules…).

Yet, the likelihood that his plan will clear the political bar it faces in the House of R’s [sic] is not high. I don’t want to be too pessimistic. I still think, for example, renewing the payroll tax holiday will clear the bar.

But my larger point is this: sure, we are facing extremely tough economic problems, but they are not insurmountable and the evidence is that they would be amenable to policy intervention.

At least, they would be if we could break out of these policy handcuffs we keep putting on ourselves.